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Factor Investing: The Rocky Road from Long Only to Long Short

29 Pages Posted: 2 Feb 2017 Last revised: 12 Apr 2017

Marie Briere

Amundi Asset Management; Paris Dauphine University; Université Libre de Bruxelles

Ariane Szafarz

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi

Date Written: January 30, 2017

Abstract

The performances of factor investing rely heavily on short sales, not only for building the initial long-short strategy, but also for regularly rebalancing the positions. Since short selling is subject to both legal restrictions and substantial costs, this paper examines how severely restrictions on short positions affect the financial attractiveness of factor investing. To fill the gap between unconstrained long-short allocations and restricted long-only portfolios, we consider two in-between strategies: the first imposes that only the market can be shorted, and the second is the so-called “130/30” scenario that caps total short exposure at 30%. The takeaways are twofold. First, any infringement to the long-short strategy can harm significantly the mean-variance performances of efficient factor-based portfolios. This is linked to the fact that the total short exposure of optimal long-short portfolios can reach figures around 400% and above. Second, the factor portfolios built originally by Fama and French (1992) with the purpose of developing asset pricing are impressively clear-sighted when it comes to portfolio management. Indeed, combining these portfolios generates mean-variance performances similar to those of optimized long-short portfolios, except for low levels of volatility.

Keywords: Investment, Asset Allocation, Factor, Short Selling

JEL Classification: G11, G01, C58, D92

Suggested Citation

Briere, Marie and Szafarz, Ariane, Factor Investing: The Rocky Road from Long Only to Long Short (January 30, 2017). Available at SSRN: https://ssrn.com/abstract=2908491 or http://dx.doi.org/10.2139/ssrn.2908491

Marie Briere (Contact Author)

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

Paris Dauphine University ( email )

place du Maréchal de Lattre de Tassigny
Paris, 75016
France

Université Libre de Bruxelles ( email )

Brussels
Belgium

Ariane Szafarz

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi ( email )

50 Avenue Roosevelt
Brussels 1050
Belgium

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